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Buyer Conceals Property Flip; Ordered to Disgorge Over $2 Million in Profit

In a recent Ontario Court of Appeal case called Meridian Credit Union Ltd. v. Baig, the court held that a buyer of a commercial property was personally liable in damages for failing to disclose to the seller his intent to “flip” the property immediately and make a sizeable profit.

The commercial property was being sold by a court-appointed Receiver. The buyer, Baig, agreed to purchase it “in trust for a corporation to be incorporated” for $6.2 million. Unbeknownst to the Receiver, Baig had made prior arrangements with an unrelated company named Yellowstone Property Consultants Corp. to immediately re-sell/direct title to the property to Yellowstone for $9 million, netting Baig about $2.8 million in profit.

Baig did not disclose the second agreement to the Receiver, who assumed that Yellowstone was a company incorporated by Baig specifically for their transaction. Neither Baig nor his lawyer corrected the Receiver’s misapprehension.

The Agreement between Baig and the Receiver did not prevent Baig from re-selling the property. It did prohibit him from assigning his interest under the Agreement without the Receiver's consent. The Receiver could arbitrarily refuse such consent unless the assignee was the “corporation to be incorporated” for purposes of the Agreement.

The Receiver became aware of Baig’s re-sale scheme through certain documents prepared by Baig’s lawyer: The deal had been structured so that the transfer from the Receiver would go directly to Yellowstone, in order to avoid the double payment of land transfer tax.

Having discovered the completed second sale, the Receiver assigned its cause of action against Baig to Meridian (which had not recouped the full amount owed to it from the borrower in the receivership). Meridian then brought a court action for an accounting of Baig’s profit on the second, $9 million, transaction or alternatively asked the court to hold Baig liable for $2.1 million in damages for breach of contract and fraudulent misrepresentation.

Meridian was successful before a Motions Court judge, who found a clear case of fraudulent misrepresentation on Baig’s part and directed a trial to determine damages. On later appeal, the court confirmed the Motion judge’s ruling.

The elements of fraudulent misrepresentation by Baig had been proven: Either personally or through his lawyer, Baig had made active efforts to hide his pre-arranged agreement to sell the land to Yellowstone and had misrepresented both Yellowstone’s corporate nature and its exact role in that transaction. Indeed, he had personally signed misleading documentation prepared by his lawyer, even though he knew it was false and did so knowing that the Receiver would rely on the information given. The court pointed out that in certain circumstances, silence and half-truths could amount to a misrepresentation in law.

The Appeal Court also found that the misrepresentations prejudiced the Receiver, since it had an obligation to obtain court approval before selling the property and would not have recommended Baig’s offer had it known about Yellowstone’s more lucrative one. Also, by relying on Baig’s misrepresentations, the Receiver lost the chance to negotiate a higher price with Baig or with any other potential buyer.

Baig was held personally liable for his misrepresentations to the Receiver, and for actively hiding the agreement to sell to Yellowstone. The Court found that Baig made fraudulent representations in his personal capacity, and thus implicitly viewed the corporate veil as having no application. Damages were to be assessed. See: Meridian Credit Union Ltd. v. Baig, 2016 (ONCA).